If you are involved in international trade, you may have to deal with foreign exchange (FX) risk. This is the risk that the value of your foreign currency payments or receipts will change due to fluctuations in exchange rates. One way to manage this risk is to use forward contracts in FX trading.

Forward Contract involves buying or selling currencies at the current market price with a future date or for delivery in the future. This option is particularly useful for risk-adverse clients who want certainty in their accounting practices in order to be able to protect their core profits. The exchange rate you agree on the day that you book your forward contract remains the same for the agreed term of the contract so that your business is not vulnerable to adverse exchange rate movements. Forwards can be booked up to a year in advance, allowing you to accurately forecast your cash flow and manage budgets with confidence. However, all forward contracts need a minimum of 5% deposit of the Total deal value.

Why would I need a forward contract?

A forward contract is an agreement between two parties to exchange a certain amount of one currency for another at a predetermined exchange rate on a specified future date. For example, if you are a UK importer who needs to pay 100,000 euros to a European supplier in three months, you can enter into a forward contract with Nexdi to buy 100,000 euros at a fixed rate of 1.17 GBP/EUR. This way, you will know exactly how much GBP you will need to pay in three months, regardless of what happens to the spot rate.

A forward contract can also be used to lock in a favourable exchange rate for a future receipt of foreign currency. For example, if you are a US exporter who expects to receive 100,000 euros from a European customer in three months, you can enter into a forward contract with your bank to sell 100,000 euros at a fixed rate of 1.20 USD/EUR. This way, you will know exactly how much USD you will receive in three months, regardless of what happens to the spot rate.

Forward contracts are customized and negotiated between the parties, so they can be tailored to suit specific needs and preferences.

The main benefit of using forward contracts in FX trading is that they provide certainty and protection against adverse movements in exchange rates. They also allow you to take advantage of favourable movements in exchange rates by locking them in advance. However, there are also some drawbacks and risks associated with forward contracts. For instance:

• Forward contracts are not standardized and not traded on exchanges, so they may be less liquid and more difficult to cancel or reverse than other FX instruments.

• Forward contracts may involve upfront or ongoing margin requirements or fees, which can increase the cost of hedging or speculation.

• Forward contracts may expose you to counterparty risk, which is the risk that the other party will default or fail to honour its obligations under the contract.

• Forward contracts may prevent you from benefiting from favourable movements in exchange rates after the contract is entered into, as you are locked into a fixed rate.

Therefore, before using forward contracts in FX trading, you should carefully weigh the pros and cons and assess your objectives and risk appetite. For further information please speak with your account manager to understand the terms and conditions of the contract and the potential costs and risks involved.

To book a Forward Contract please speak to your account manager at Nexdi.